Journal
EUROPEAN ECONOMIC REVIEW
Volume 53, Issue 5, Pages 568-587Publisher
ELSEVIER
DOI: 10.1016/j.euroecorev.2008.10.002
Keywords
Labor market search; Labor market participation
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Cross-country differences in labor market participation are often larger than differences in unemployment rates. The same holds true across demographic groups within a given economy. We argue that the interaction between labor force participation decisions and labor market frictions can help us understand these patterns. This interaction highlights dynamic aspects of the participation decision, in contrast to standard textbook treatments that emphasize static costs and benefits of participation. We extend the standard labor market search problem to allow for a third state-non-participation and assumes that stochastic participation costs precipitate flows into and out of non-participation. We fully characterize the worker's decision problem and use numerical simulations to demonstrate how participation patterns vary with individual characteristics and with labor market conditions. (C) 2008 Elsevier B.V. All rights reserved.
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